Testamentary Trusts | How a Frail Spouse Can Protect Assets for Loved Ones

What can be done to protect assetsThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More when a spouse’s health is failing and thinks he or she may die before their spouse–who has long-term health issues–dies? While the circumstances are sad, they do present an opportunity for planning in the form of a testamentary trust. This is a trust set up within a will.

Yes, a will can create a trust.  These are commonly seen in wills for young children, however, in this case the trust would be for an aging partner.

The testamentary trust arrangement works best where, frankly, one spouse (the surviving spouse) is probably going to require nursing home care, while the other spouse (the frail spouse) is older or has health conditions that suggest he or she may die first.

What Does a Testamentary Asset Protect Trust (TAP Trust) Do?

• It protects assets after the frail spouse’s death, because they are not counted as assets for the surviving spouse, unlike most trusts that are set up while living.
• It can supplement the needs of the surviving spouse by paying for things that Medicaid doesn’t provide, like additional treatments, travel, companionship, and niceties. But the government will not require–because it can’t–that it pay for anything, including nursing home care. This is the law in Massachusetts under MassHealth regulations and in many other jurisdictions.

Example: Say our couple has cash, investments and/or a home worth $500,000.

As it stands, if either goes to a nursing home, these assets largely have to be spent on care. They are already countable and vulnerable. We may not have five years to work with to place all (or part) of the assets in an irrevocable living trust.

The TAP trust strategy: Put the assets in the name of the frail spouse, who we believe may die first. At death, the assets will pass through his or her will. Instead of being paid to the surviving spouse, the assets will fund the TAP trust that was drafted specially into the will. This accomplishes protection of the assets without a lookback period.

The $500,000 of assets left to the TAP trust will create a fund that the surviving spouse can tap into, but it will not be countable by Medicaid; the TAP trust will not be required to be spent on nursing home costs.

In scenarios like this one, a family with a TAP trust is a clear winner. A family without the TAP trust would have to spend down after the first spouse dies, usually to $2,000 worth of assets, before qualifying for Medicaid. In this example, up to $498,000 could be spared.

What happens if either spouse ends up in a nursing home while both are living?

They would have to spend the assets, which would have been required anyway if they had done nothing. So there is almost no down side to the TAP trust.

Then, what are the down sides to a TAP trust?

One of the few negatives is if both spouses die within a short time of each other. In this case, there may be an unnecessary probateProbate can refer to the process of settling the estate of a deceased person. Read More procedure, though there is a will that would make it as easy as possible. There also will be a cost to prepare this highly specialized will.

What are other options for asset protection?

Irrevocable trustsA trust that cannot be revoked by the Grantor. Irrevocable trusts are created to either save taxes or protect assets, or both. More have a five-year look back during which the assets are deemed available to have to be spent on long-term care. But, there is no look back for the TAP trust.

While both spouses are living, the couple can use other techniques to protect their assets, like a Medicaid annuity. This investment strategy turns assets into an income stream, so they do not have to be spent on nursing home care. In many cases, the testamentary trust and the Medicaid qualified annuity are a winning combination.

You can learn more about annuities in this article, Purchasing an Annuity: A Strategy For the Healthy Spouse, While the Other is in a Nursing Home.

Interested in exploring other ways to protect your assets from long-term care costs? We’ve compiled some useful strategies in Planning to Protect Property from Nursing Home Costs.